Question

Question #4: IS-LM Model: Change in Fiscal Policy (a) Suppose Congress had announced that they were going to increase government spending to G = 400. Assume that (M/P)Sreturns to 1600. Now the set of equations are the following: C = 200 + 0.25YDI = 150 + 0.25Y –1000i T = 200 G = 400(M/P)S= 1600(M/P)d= 2Y –8000i Calculate the new level of equilibrium interest rate (i) and equilibrium output (Y).(b) Calculate the new levels of consumption (C) and investment (I) when government spending increases.(c) Graphically illustratethe change in the IS-LM Model as result of the change in government spending.In your graph draw the initial equilibrium (similar to what you did for Question 3(a)). Clearly indicate the initial equilibrium interest rate and output. Label this point as Point A. Illustrate thenew equilibrium. Be sure to clearly indicate the new levels of equilibrium interest rate and output. Label this point as Point B.

Question #4: IS-LM Model: Change in Fiscal Policy (a) Suppose Congress had announced that they were going to increase government spending to G= 400. Assume that (M/P)S returns to 1600. Now the set of equations are the following: C = 200 +0.25YD I = 150 +0.25Y – 1000i T= 200 G = 400 (M/P)S = 1600 (M/P) = 2Y – 8000i Calculate the new level of equilibrium interest rate (i) and equilibrium output (Y). (b) Calculate the new levels of consumption (C) and investment (I) when government spending increases. (c) Graphically illustrate the change in the IS-LM Model as result of the change in government spending. In your graph draw the initial equilibrium (similar to what you did for Question 3(a)). Clearly indicate the initial equilibrium interest rate and output. Label this point as Point A. Illustrate the new equilibrium. Be sure to clearly indicate the new levels of equilibrium interest rate and output. Label this point as Point B.

Answer 1

wton 4 Question 4 suppose a suppose Congress had announced that they wwe going to increase government spending to a=400. and mo is retums to 1600. ype disposable =(y-7) i come Now, e = 200+ 0.2s yo where Is 150+0.25 Y - 1000 1 T = 200 a = 400 om js = 1600 (M/pJds 27-800i Now, (6) Now equation of Is cauc! y=et Itu -) Y = 200 70.(y-7)+ 150+0.2sy-1600i + 400 Y-0.25Y-0.25y: 200 - 0.25 T +150-1000i =) ya 7 400 => substituting T= 200 we get 7400 200 - (0.95 * 200] +150-1ovo i 0.5Y --- 2) Asythe oisyt loroi = 700 Equation is is the Is care. Scanned with CamScanner

Now Equation of LM (AUL! - ri d = ( 4 ) 2) 27-8000i = 1600 2 мою, Рум 24 би di) wwwrkt- 2y = 1600 + 8020 i 21 y (1600 + 80001) (800 7 4 oroi) Now substituting y=800+4000 in equation (&) wc qut! - 0.5y + lovi= 700 2) O.S (80+ 4 000 ) +100i = 700 =) 400 + 20001 + 100i = 700 ) 36001 = 300 2) is on or 10010 Now substituting i= 0.1 in equations as we get! oisyt looi = 700 =) Oisy +(100DX01) =700 =) Osy + 100 = 700 0.5y = 600 =) Ye 120 ej Hace, new level of equilibrium iu trest rate i= 0.1 or 10% and equilibuum output (Y) = 1200. Scanned with CamScanner

New level of Consumption 2 + 0,8 ( y -T) 2) C = 200 +0.25 ( 1200-200) les 200 + (0.25 X lovo) = 450 c) es 200 td and Investment reso +0.25Y - 10001 - I - 150 +0.25 x 1200) - 11000 X011) = 150 7300 - 100 = 350 Amce new level of consumption (e) = 450 and künst ment (I) = 350 . O Now when a increases, Is cnue will shift rigutund from Isi to IS2, and initial equilibrium out but i; Yo and interest rate is to it 1 Intres &rate (i) LM B isme 7 TSV Isi Scanne with CamScanner VO- 1200 output (y)